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Remittances by Emigrants: Issues and Evidence

World Institute for Development Economics Research (UNU-WIDER) | December 1, 2003

Remittances from migrants are a growing and relatively stable, market-based external source of development finance. Remittances bring foreign exchange, are a complement for national savings, and provide a source of finance for capital formation (mainly small-scale projects). Through these mechanisms, remittances can support economic growth in recipient countries. As remittances depend on the flows of people that are often less volatile than capital flows, remittances are expected to be more stable than such capital flows as portfolio investment and international bank credit. Remittances are also an international redistribution from low-income migrants to their families in the home country. These transfers act as the international mechanism of social protection based on private transfers. The sustainability of remittances over time depends on various factors such as migration pressures in the sending countries and the evolution of migration policies in advanced economies.

Currently, remittances—after foreign direct investment—are the most important source of external finance for developing countries, and they surpass foreign aid. Remittances are relatively concentrated in a group of developing countries: the top 20 countries receiving worker remittances capture around 80 per cent of the total worker remittances to the developing world. In terms of value, the three main recipient countries are India, Mexico and the Philippines, while the three main source countries are the US, Saudi Arabia and Germany. The concentration of remittances in a group of recipient countries dampens somewhat the reach of remittances to the developing world, although it is worth noting that the main recipients are the large, low-to-middle-income developing countries.

The international market for remittances is segmented and inefficient, as reflected by the high costs of intermediation. Money transmitter operators dominating the market charge high fees and use overvalued exchange rates. Commercial banks in both the source and recipient countries have a low share of the global remittances market. But empirical evidence shows that the costs of remittances are lower when sent through banks than through money transfer operators.

There is, however, room for leveraging a greater value for remittances if international money transfers were conducted at lower costs. The amount of remittances is below the socially optimal level required for a more competitive cost structure in the market for remittances. The development potential of remittances is thus diminished under current market realities.

The paper is organized in seven sections in addition to the introduction. Section 2 discusses global and regional trends in remittance flows and their growing importance as a source of external transfers to developing countries. Section 3 examines measurement issues and discusses the main micro-motives for remittances and their implications for stability across cycles, while section 4 analyses the development impact of remittances (effects on savings, investment, growth, poverty, income distribution). Section 5 overviews the international market for remittances and provides evidence on the costs of sending remittances to various country groups. Section 6 highlights the policies for cutting the costs of sending remittances and thus enhancing their development impact. Section 7 concludes.

By Andre Solimano


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